Cablegate: Istanbul Markets "Wait and See" On Government

This record is a partial extract of the original cable. The full text of the original cable is not available.





E.O. 12958: N/A


Sensitive but Unclassified - not for internet distribution.

1. (SBU) Summary: Leading Istanbul bankers and market
analysts see current market sentiment as one of "watchful
waiting," but believe that despite recent declines in the
stock market, there is an underlying expectation that the
Turkish government will reach agreement with the IMF on the
fourth review and with the U.S. on Iraq modalities. Analysts
concede that AK's "learning curve has been expensive," and
that the new government's economic policies remain Turkey's
biggest risk (especially on bank sector reform), but they are
betting at the end of the day on international recognition of
Turkey's interests. End Summary.

2. (SBU) Complacency and Watchful Waiting: In a round of
separate meetings on January 22 and 23 with visiting Ankara
DCM and Deputy Econ Counselor, financial and market analysts
predicted that AK would "stick with the program" and not
permit relations with either the IMF or United States to
reach an impasse. Citibank Country Risk Manager Peter
Rossiter characterized the markets as complacent, and himself
offered a relatively sanguine view of the government, arguing
that it is not "intentionally" departing from the ongoing
reform program, but instead has been hampered by its
inexperience and lack of depth in its economic team. He
conceded that the government's lack of fiscal discipline is a
serious concern, and that Citibank remains concerned about
how Turkey will "bridge the gaps" that may occur as a result
of an Iraq operation and its own fiscal policies, but noted
that the bank's customers do not appear to share these
worries. "The moral hazard of potential U.S. assistance is
serious," he noted. More generally, however, he saw
fundamentals in Turkey moving in a positive direction, saying
that Citibank's overall perspective is more positive than a
year ago as a result of enhanced political stability, a
stabilized banking system and companies that are "earning
their way out of the 2001 crisis."

3. (SBU) Getting in on the Game: Pointing to the Treasury's
successful January 22 auction, observers also drew attention
to the reappearance of foreign investors in the market.
While conceding that the core of the market remains the key
banks that cannot afford to exit (given that T-bills make up
35-40 percent of their assets), Bender analysts Murat Gulkan
and Emin Ozturk attributed foreign demand to the success of
last year's carry trade, where investors realized a 65-70
percent return based on a relatively stable exchange rate.
Morgan Stanley, they noted, had recently put out a paper on
this issue.

4. (SBU) Difficult Relations: While conceding that the agenda
for completion of the much-delayed fourth review remains
daunting, analysts were virtually unanimous that the market
anticipates resolution of the outstanding issues. Even
Global's Cem Akyurek, traditionally a sceptic about the
government, expects its completion, while analysts at TEB
investment argue that the government has "no choice" but to
reach a settlement. Disbank's Tayfun Bayazit expects a
satisfactory budget and abandonment of the most controversial
proposed procurement law amendments, but sees the oustanding
Pamukbank/Yapi Kredi problem as the key imponderable
(reftel). Beyond the January 31 deadline facing the banking
board on that issue, all pointed to other key milestones
including submission of the budget in late January.
Observers agreed that the market expects the IMF to return by
mid-February, and while some slippage may be allowed because
of the upcoming holiday (the entire week of February 10), any
delay beyond that point will damage market confidence.

5. (SBU) Moral Hazard: Other banking and market analysts
shared Citibank's belief that the expectation of U.S.
assistance has created a moral hazard to one degree or
another, and is encouraging the markets to look beyond such
key issues as the sustainability of real interest rates.
There was a general consensus from our interlocutors that the
markets believe that the U.S. and IMF will take a more
charitable view of Turkey's actions in the event of an Iraq
operation. We reiterated to all interlocutors that any U.S.
assistance is conditioned not just on military cooperation
but on continued economic reform.

6. (SBU) Comment: If markets are sanguine about the immediate
future, there remains an underlying pessimism about Turkey's
long-term prospects. Akyurek, who has headed Global's
research department for five years, argued that essentially
"AK doesn't understand the Washington consensus" and remains
Turkey's biggest risk. The fact is especially frustrating,
he argued, because Turkey "doesn't need a lot for takeoff--
1-2 billion in FDI and 3-4 billion in loans would suffice."
But for that to occur, Turkey needs 3 good years of "flawless
economic management." In his view, and in that of most of
those we talked to, while Turkey may get through the next few
months, it is very unlikely to get to that take-off point.
End Comment.

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